Ajit Kumar Sengupta, J. - (1.) In this reference under Section 256(2) of the Income-tax Act, 1961 (for short, "the Act"), for the assessment year 1984-85, the following questions of law have been referred to this court: "1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest paid by the firm to its partners cannot be disallowed under Section 40(b) of the Income-tax Act, 1961, as the partners were representing their Hindu undivided family in the firm and the interest were paid to them in their individual capacity ?
(2.) Whether, having regard to the fact that the three Explanations inserted by the Taxation Laws (Amendment) Act, 1984, were with effect from April 1, 1985, the Tribunal was justified in law in holding that they were only clarificatory in nature and must govern assessments prior to the assessment year 1985-86 and in that view directing to delete the add back of interest paid to the partners in their individual, capacity as they represented their Hindu undivided family in the firm ?" 2. Briefly stated, the facts are that the assessee, in its return for the assessment year 1984-85, for which the relevant previous year ended on October 15, 1983, claimed deduction in respect of interest amounting to Rs. 2,720 and Rs. 17,605 paid to Shri B.P. Kedia and Shri K.P. Kedia, respectively. The said persons were partners of the assessee-firm as kartas of their respective Hindu undivided families (for short, "the HUF"). The interest was claimed to be paid to the said persons in their individual capacity and not as kartas of the Hindu undivided families. It was claimed that the provisions of Section 40(b) of the Act were not applicable to the said interest. The Assessing Officer rejected this contention. He was of the view that the Hindu undivided family as such could not be a partner and the said two partners were really partners in their individual capacity qua the other partners and they were accountable to their respective Hindu undivided families for the share income from the firm. He applied the provisions of Section 40(b) and disallowed the said interest.
(3.) The assessee challenged the above disallowance in appeal before the Commissioner of Income-tax (Appeals) and contended that interest paid to Shri B.P. Kedia and Shri K.P. Kedia could not be disallowed under Section 40(b) as interest was paid to them as individuals, whereas they were partners in the assessee-firm as kartas of the respective Hindu undivided families. The assessee further relied upon Explanation 2 to Section 40(b) inserted with effect from April 1, 1985.;